Inflation is a major threat to the economy. This is evident in public polling and consumer sentiment, as well as recent earnings reports and statements by government officials. And it’s something to keep in mind when looking for stocks to buy.
Around 80% of companies reporting earnings for the third quarter mentioned factors such as supply chain challenges, difficulty finding labor, and rising costs on their conference calls. This is a stark contrast to the past decade, where deflation and low demand were the biggest challenges. To make a profit in this environment, investors will need to adapt their strategy and approach.
Focusing on stocks with high levels of inflation is a profitable strategy. Pricing power, as these companies’ margins will continue to expand. Stocks without pricing power will likely underperform as margin compression reduces EPS.
These stocks are worth considering for investors who want to invest in an inflationary environment.
Stocks to Buy to Inflation: Olin, (OLN).
OLN, a global manufacturer and distributor of chemical products, focuses on three segmentsThe following products are available: Epoxy, Vinyls and Chlor Alkali Products; Epoxy; and Winchester. The company operates through its sales personnel as well as direct sales to industrial clients and wholesalers.
OLN is a great choice in an inflationary environment, as its chemicals are used in many industrial processes. Its customers who require these chemicals cannot afford to pay less, which gives it pricing power. Further, OLN has a dominant market share in many categories which means that it’s benefitting from a strong industrial recovery.
Another indication of its strength is found in its recent earnings report, with the major highlight being the company’s authorization of a Buyback of $1 billion. It also saw a 63% Year-over-year IncreaseIn revenue. Net income had a major turnaround, going from a loss of $736.8 million in last year’s Q3 to a profit of $390.7 million this year.
Its outlook remains bright, as analysts are expecting the company’s full-year EPS to reach $8.64 which implies a forward P/E of 5.7. The buyback program is accretive by around 12% and should give EPS another boost.
OLN’s Ratings POWRThis promising outlook is evident. The company has an overall A rating, which translates to “strong buy” in our proprietary rating system. Stocks rated A have an average annual performance exceeding 30%. Click here to view the complete POWR Ratings for OLN. Here.
TX manufactures and sells steel. It’s currently one of the largest steel companies in the world and operates through two segments — steel and mining. The Luxembourg-based company also provides engineering and financial services.
In the current environment, steel companies are likely to outperform. The main reason is that infrastructure spending, construction activity, and industrial production are all growing at a rapid pace and are expected to continue strong over the next few decades. Further, in an inflationary environment, a steel company’s assets also appreciate in value as the cost of building new production also increases. It is also a supplier of inputs and has a higher pricing power.
These positives are evident in TX’s recent earnings report as its profit margins reached 23% which is a significant improvement from its pre-pandemic 5% profit margin. The company also reported Revenue growth of 115%. It also saw an amazing increase in earnings, from a loss last fiscal year to $6.12 per ounce this fiscal year.
Additionally, earnings are expected continue to grow, though at a slower pace. Despite the earnings growth, TX is still quite affordable with a forward PE of 4.2. This is significantly lower than the S&P 500’sForward P/E of 21. Wall Street is also bullish on this stock. Four out of six analysts covering the stock have a buy rating and a consensus target price. This implies a nearly 40% upside.
TX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to “strong buy” in our proprietary rating system. The POWR Ratings are calculated using 118 factors, each factor being weighted to the best degree.
Not surprisingly, the stock has a B for Growth and Value which isn’t surprising considering its low P/E and massive earnings growth. To see TX’s complete POWR Ratings, click Here.
Stocks to Buy for Inflation: Chemicals (CC).
CC stock is the last of our stocks you can buy to inflate. It is a distributor and manufacturer of performance chemicals. The company is based out of Wilmington, Delaware. It is a spinoff. Dupont (NYSE:DD). It is located all over the globe and has four major units: Titanium Technologies, Thermal & Specialized Solutions, Advanced Performance Materials, and Chemical Solutions.
CC will enjoy an inflationary environment, just like OLN. Its chemicals are inputs for all kinds of products. Titanium dioxide, a key ingredient in white paint, is the company’s biggest revenue source. CC is therefore also closely connected to the housing sector.
Housing is one of our strongest sectors and it is not slowing down due to favorable demand and supply dynamics. This is partly due to the strong labor market and rising wages, low rates and strong household balances. Such strong fundamentals also mean it’s likely we will see more home improvement and renovation projects which will also benefit CC.
These positive fundamentals were also reflected in CC’s recent earnings report which showed a 36% increase in revenue to $1.7 Billion. The company’s gross profit increased 66.1% to $427 million, and net income surged 181.6% to $214 million. The EPS grew overall by 176%, to $1.27.
The company’s momentum is expected to continue, with projections for $4.11 in full-year EPS, more than double last year’s figure. It also means that shares are very affordable with a forward price to earnings ratio of 7.2, and a dividend yield rate of 3%.
CC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to “strong buy” in our POWR Ratings system. To provide investors with additional insight, the POWR Ratings also evaluates stocks based on various components. The stock has an A rating for quality, which is logical considering Wall Street has a consensus price target $43.29. This suggests a 30% upside over current levels. Click Here to see CC’s full POWR Ratings.
Jaimini Desai didn’t hold any positions, directly or indirectly, at the date of publication. These opinions are the author’s and are subject to the InvestorPlace.com Publishing Guidelines.
Jaimini Desai is a financial reporter and writer for almost a decade. He has helped many investors make money on the hottest growth trends. His past experience includes writing for Investopedia and Seeking Alpha. He is Chief Growth Strategist of StockNews.com, and the editor for the POWR Growth and POWR Stocks below $10 newsletters.